Price Fixing in the Memory Market

The unfolding tale of an ineffective DRAM conspiracy

The U.S. Department of Justice has been looking into allegations of price fixing in the memory industry for more than two years. In September, Infineon Technologies AG, headquartered in Munich, Germany, agreed to plead guilty to participating in an international conspiracy to fix prices for dynamic random-access memories (DRAM) sold to certain PC and server makers in the United States from July 1999 to June 2002. It agreed to pay US $160 million in fines and cooperate with the investigation. Ironically, apparently this particular conspiracy to fix the price of DRAMs, a commodity product, was hardly successful. Yet Infineon surely will not be the only chip maker to face fines.

In the last five years, consolidation in the DRAM industry has winnowed the number of major producers down to a group small enough to form an effective cartel, making for a tempting situation [see " DRAM Inc."] Even so, there is nothing in the industry's recent trends that clearly points to a conspiracy that succeeded in boosting prices, say analysts. And from their knowledge of the industry, these experts find it hard to imagine DRAM companies agreeing on prices and actually sticking to the agreement.

The first two years in which a DRAM conspiracy is alleged to have existed, 1999 and 2000, were good for the industry, with significant revenue growth and several swings in price, notes DRAM analyst Sherry L. Garber of Semico Research Corp., in Phoenix, Ariz. In 2001, however, DRAM revenues fell by about 61 percent. The average aggregate selling price, a weighted measure of the price of all types of DRAM, dropped 83 percent; the average price per megabit, which can fall even in good years, plummeted 76 percent, to below production costs.

A price spike in the first quarter of 2002, when prices jumped 114 percent, was seen by some as the incident that provoked a PC maker to call in the Justice Department. But that spike can also be explained by simple supply-and-demand issues, notes Garber. That same quarter, the PC industry demanded more memory of a type called double data rate (DDR) than it had been telling DRAM makers it would need. In addition, says Nam Hyung Kim, principal analyst for memory at iSuppli Corp., in El Segundo, Calif., many chip makers had shuttered fabs in 2001 in an attempt to stem their losses, tightening supply.

Infineon's guilty plea suggests that others were involved in a DRAM price-rigging conspiracy, and that there will be more fines, as well as penalties, and perhaps even jail sentences, to come

Regardless of how much of an impact the conspiracy had on price, the fact that Infineon agreed to plead guilty indicates that others were involved, and there will be more fines, as well as penalties and perhaps even jail sentences, to come.

Here's how these conspiracies typically unravel, according to Robert Lande, director of the American Antitrust Institute, in Washington, D.C. Since 1993, the antitrust arm of the Justice Department has been offering amnesty to the first conspiring company to come forward with evidence, even after an investigation has started, and there is often a smaller reward for being the second to give evidence. "That puts cartel members in a very iffy position," he says.

The evidence the Justice Department collects from the protected company usually must include proof that the conspirators met and intended to fix prices. "All the economic analysis in the world doesn't mean a thing," says Lande. "You've got to have hard, old-fashioned evidence."

With that evidence in hand, the Justice Department pressures the other conspirators to plead guilty. Rather than go to court and hash out the incredibly complex question of what prices would have been if there had never been a conspiracy, the companies and the government usually settle.

According to Lande, the government often proposes initially a fine of 20 percent of the conspirator's U.S. revenue from the product in question, and the two sides negotiate downward from there.

Unlike the other top DRAM makers subpoenaed at the start of the investigation, Micron Technology Inc., in Boise, Idaho, the world's second-largest DRAM producer, has boldly claimed it will not have to pay a fine, suggesting that the company has been granted immunity by the government. "We don't expect any indictments, plea agreements, charges, [or] fines," said Micron CEO Steven Appleton in a 29 September conference call to analysts. A Micron spokesman told IEEE Spectrum only that the company is cooperating with the investigation.

Civil suits by customers can follow criminal fines, and, if a price increase is passed along to consumers, they can sue, too. Lande says that direct customers, makers of PCs and servers in this case, often decline to sue the conspirators, in part because they must maintain a relationship with the supplier. Calls to Apple, Gateway, Hewlett-Packard, and IBM regarding possible legal action were not returned. A Dell spokesman said the company doesn't "offer comment on any of our suppliers."

As for the computer consumer suits, they are legal in only about half of U.S. states. But populous California is one of them, and consumers there won a "monster" $1.1 billion from Redmond, Wash.-based Microsoft Corp. in 2003 for using its monopoly power to overcharge for its Windows operating systems, American Antitrust's Lande points out. Within weeks of Infineon's plea, at least four law firms announced that they were seeking plaintiffs for a class-action suit. But rather than claim that consumers were hurt, they are alleging that investors were duped because Infineon's $5.9-billion initial public offering in 2000 was overvalued based on the conspiracy's inflated prices.

Government fines and private lawsuits will likely have little impact on the operations or investment plans of DRAM makers, says iSuppli analyst Kim. "Legal issues are happening all the time in this industry," he says. "Historically, it never affects the market."

DRAM INC.: Dynamic random-access memory has been consolidating into the hands of fewer big producers. But an illegal cartel they are suspected of forming from July 1999 to June 2002 [yellow] couldn't keep the price of DRAM from crashing in 2001.